Friday, November 16, 2012

Progress at the Fed

I am a forward guidance skeptic. At heart, I'm an "expectations channel" skeptic. But, if the Fed is going to give forward guidance, having it be based on benchmarks rather than the calendar seems clearly better to me.

The idea is rather than saying, "rates at zero til 2015", to say "rates at zero til unemployment falls to X% or inflation rises to Y%".

Of course, picking X and Y is not an easy task. Bernanke might think X=7 and Y=2.5, while Krugman might be more of an X=4 and Y=10 kind of guy.

Charles Evans is given credit for pushing this path, and Janet Yellen, the Fed vice chair seems to be a recent convert.

Obama's re-election gives the Fed a lot more breathing room to experiment with these non-traditional policies, so I give Yellen political astuteness points for holding her fire until after the election.

I still don't see benchmark forward guidance as anything remotely resembling an effective medicine to cure the economy, but it is a better form of guidance than calendar guidance, even though all the caveats about time consistency, binding future Feds, and political pressure still apply equally.